THE GOVERNMENT will this week seek to get agreement on a €10 billion recapitalisation of the banking system with the help of private investors.
Minister for Finance Brian Lenihan will meet in the coming days with the chiefs of Allied Irish Banks (AIB), Bank of Ireland, Irish Life Permanent (ILP) and Anglo Irish Bank to discuss specific proposals for an injection of new capital into the system via a new fund in which the Government will participate.
The move by the Government is aimed at restoring confidence in the banking system and at encouraging lending.
In a statement last night, the Government said the requirement for public investment will be assessed on a case by case basis, having regard to the "systemic importance" of the institutions in question and the most effective and economical use of resources available to the State.
The Government plans to use money from the National Pension Reserve Fund, or an other public source, to support existing shareholders and new private investors. Legislation underpinning the pension fund will be amended, the Government said.
The sum of "up to €10 billion" set out in the statement represents the Government's view of the total amount required to recapitalise the system following a collapse in the share values of the Irish institutions.
The US private equity investors and Irish and international fund managers who have expressed interest in investing in Irish banking will now be asked to formalise their proposals.
The Government statement followed a 7½-hour meeting in Government Buildings yesterday at which Taoiseach Brian Cowen and Mr Lenihan discussed measures to restore stability to the quoted Irish banks, which have lost more than €56 billion of their market capitalisation since the stock market peaked in February 2007.
Also in attendance at the meeting were Michael Somers, head of the National Treasury Management Agency; Financial Regulator Pat Neary; Governor of the Central Bank John Hurley; Dermot McCarthy, secretary general of Mr Cowen's department; and David Doyle, head of the Department of Finance.
"The State's investment may take the form of preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis. In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government," the statement said.
"A key principle in the operation of such a fund will be to secure the interests of the taxpayers through an appropriate return on, and appropriate terms for, the investment."
While the statement said institutions are being asked to submit their proposals "by early January", it is understood that the Government expects to rapidly advance the recapitalisation plan this week. Mr Lenihan believes there must be senior management changes in any institution supported by the State, it is understood.
On the question of whether the Government would support recapitalisation of Anglo Irish Bank, whose shares collapsed last week, Government sources said it was open to every institution to make proposals to the Government. EU competition rules would not allow any discrimination between institutions at this stage, sources said.
"Any State investment will be undertaken in line with best practice in the EU and elsewhere and consistent with EU rules and, in particular, the recent European Commission communication on recapitalisation," the statement said.
"Recapitalised institutions may be required to comply with such requirements as to transparency and commercial conduct as the Minister sees fit."
Shares in Anglo Irish Bank have lost 96.5 per cent of their value in the past year.